Bilski: Supreme Court Maintains Protection for Business Method Patents But Leaves Open Questions

Date: July 2, 2010

It would seem that rumors of the death of business method patents have been highly exaggerated. Despite cries over the years from across the economic spectrum of the stifling effect that business method patents may have on new innovations in software development, medical diagnostics, and other fields, and that more formulaic clarity is required in determining what should be eligible for patent protection, the Supreme Court refused earlier this week to recognize a flat-out proscription against patents for business processes and other methods.

Rather, the Court confirmed the long-standing, and admittedly subjective (and some have argued far too speculative), rules for establishing patentability for any invention, including business processes and other methods. These rules are: (i) that laws of nature, physical phenomena, and abstract ideas are not patentable (although a specific application of these concepts may be patentable), and (ii) the method must otherwise meet the requirements of any patentable invention; namely, that it must be novel, nonobvious, and clearly and sufficiently described by the inventor. The Court's ruling thus holds open the door of opportunity for companies in all areas of technical endeavor to develop and patent innovative methods, including those methods designed to improve a company's method of doing business.

Under the United States Patent Act, only new and useful processes, machines, manufacture, or composition of matter, may be patented. In Bilski v. Kappos, the United States Court of Appeal for the Federal Circuit - the appellate court charged with hearing all patent matters - rejected its prior test for determining whether a claimed invention is a patentable "process", i.e., whether the invention produced a "useful, concrete or tangible result." Instead, the Federal Circuit held that a claimed process is patent eligible only if (i) it is tied to a particular machine, or (ii) it transforms a particular article into a different state or thing. In that this so-called "machine or transformation" test was now the sole test for determining the patent eligibility of a particular process, the Federal Circuit held that the invention at issue - a method explaining how buyers and sellers of commodities in the energy market can protect, or hedge, against the risk of price changes - was not eligible for patent protection.

In its much anticipated decision, the Supreme Court overruled the Federal Circuit's holding that the "machine or transformation" test is the sole test for determining process patent eligibility; instead holding that that this test is merely a useful tool in determining whether or not a claimed process is patentable. The key test, the Supreme Court held, is whether or not the claimed process merely claims a law of nature, a physical phenomena, or an abstract idea; all of which are not patentable subject matter. The Court, however, ultimately affirmed the Federal Circuit's holding that the "hedging" claims in the patent at issue were not patentable because they were directed to an "abstract idea".

With the decision in Bilski, the Supreme Court has eased fears among patent holders (and would be patent holders) concerning the status of thousands of patents and patent applications that may not have met the strict "machine-or-transformation" test applied by the Federal Circuit. The decision continues the Court's current trend of directing that the patent statute is not subject to any one particular bright line test, but that the merits of a patentable invention must be evaluated in context and on a case by case basis.

All nine justices agreed that the method claimed by Bilski and his partner for hedging risks is an abstract idea not subject to patent protection. The unanimous Court also agreed that the Federal Circuit's "machine-or-transformation" test is not the "exclusive" test for patentability. The justices disagreed, however, on the approach to be used in defining the scope of patentable subject matter.

Justices Kennedy, Thomas, Alito, Scalia (in part) and Chief Justice Roberts agreed that business methods may be patentable but that Bilski's claims were not patentable because they were directed to an abstract idea. Justice Kennedy, in the portion of the opinion that Justice Scalia did not join, further opined that the section of the Patent Act that defines what is patentable is a "dynamic provision designed to encompass new and unforeseen inventions." He further commented that the strict application of the Federal Circuit's "machine-or-transformation" test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals" among others. Importantly, however, Justice Kennedy made clear that he did not intend to comment on the patentability of any particular invention; each of which should be evaluated on its own merits.

In a concurring opinion joined by Justices Ginsburg, Breyer, and Sotomayor, Justice Stevens expressed the view that business methods should not be eligible for patent protection. Justice Stevens wrote that allowing such patents is likely to stifle innovation and harm the public good, though he was quick to acknowledge that businesses are certainly free to protect such methods as trade secrets. Amazingly, had Justice Scalia (who joined Justice Kennedy only as to part of his opinion) joined with Justice Stevens, this article would be discussing the death of business method patents, not their possible resurgence.

As a result, patent owners and applicants, as well as their competitors and alleged infringers, are confronted with an ambiguous standard regarding the eligibility of patent protection for processes. Although the Court did not come right out and say that the "machine or transformation" test constitutes a safe harbor where a process will squarely fall within the scope of the Patent Act's protection if it is met (assuming, of course, it meets the other requirements of the Act including novelty and nonobviousness), it appears quite likely that a process that meets this test will qualify as patentable subject matter. Indeed, hours after the Supreme Court issued its decision, the Patent and Trademark Office issued a memo to its examiners recommending that they continue using the "machine or transformation" test as the primary means of determining the patent eligibility of subject matter claiming a process. Even if, however, a claimed process does not meet this test, the Supreme Court made clear that it may still be eligible for patent protection if it does not otherwise claim a law of nature, physical phenomena or abstract idea. Unfortunately, neither the Supreme Court's decision in Bilski, nor years of Supreme Court and Federal Circuit precedent, provide significant guidance on the definition of an "abstract idea"; rather, the Courts' decisions lead to the conclusion that "we'll know it when we see it".

Because the "machine or transformation" test is fully endorsed by the Court as one of the appropriate tests for patentability (in fact, it seems to be the only concrete and clear test still endorsed by the Court), inventors seeking patent protection for a process or method should make great effort to ensure that at least some of the claims in their application meet the requirements of this test. Such claims are the least likely to be challenged by either the Patent and Trademark Office or future infringers seeking to invalidate the resulting patent because of their claim to unpatentable subject matter. As to claims that don't meet the "machine or transformation" test, inventors should be as specific as possible about the scope and breadth of their invention to avoid falling into the undefined world of claiming an abstract idea.